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Obama Counts on Re-Election Clout to Win on Fiscal Cliff

Geithner says no budget deal without tax increases.

President Barack Obama’s hard stance on the “fiscal cliff” talks is a bet that his re-election gave him the political clout to force Republicans to accept higher taxes on upper-income Americans as a first step toward reducing the federal deficit.

Obama’s aggressive posture was shown in the proposal Timothy F. Geithner laid out for congressional leaders last week: a reprise of the president’s prior budget proposals, with $1.6 trillion in tax increases and about $350 billion in health care savings, primarily in Medicare. He also asked for an Aug. 1 deadline for decisions on income tax overhaul and further spending cuts.

“You could see the shock in the Republicans -- this is not what they were expecting from the White House,” said Stan Collender, managing director of Qorvis Communications LLC in Washington and a former staff member for the House and Senate budget committees. “There was almost euphoria among Democrats that the president was playing hardball.”

The two parties are in stalemate over what spending cuts and revenue increases should be approved to cut a budget deficit that’s exceeded $1 trillion for each of the four years Obama’s been in office. The administration says no agreement is possible unless Republicans agree to increase tax rates for the highest earning Americans, a stance underscored by Geithner in a sweep of the Sunday talk shows. Republicans oppose any tax rate increase and demand deeper cuts than Obama has offered, a line that House Speaker John Boehner drew on one show yesterday.

Both administration officials and congressional Republicans say they want a deal before year’s end -- without either side publicly offering any compromises.

“There’s not going to be an agreement without rates going up,” Geithner said in a taped interview that aired yesterday on CNN’s “State of the Union” program. Republicans will “own the responsibility for the damage” if they “force higher rates on virtually all Americans because they’re unwilling to let tax rates go up on 2 percent of Americans.”

Obama wants to boost top income-tax rates back to the levels they were when President Bill Clinton left office. The top rate then was 39.6 percent, compared with 35 percent today.

Boehner said Republicans aren’t ready to give in, and the president should take the lead by offering concessions.

House Majority

“They must have forgotten that Republicans continue to hold a majority in the House,” Boehner, an Ohio Republican, said on “Fox News Sunday.” “The president’s idea of a negotiation is ‘roll over and do what I ask.’ We need to find common ground, and we need to find it quickly.”

Collender puts the odds of failure at 60 percent, as both sides need to prove their mettle to core supporters.

The risk for Obama is that Republicans will match his brinkmanship and no deal will be reached. The result would be the “fiscal cliff,” the more than $600 billion in automatic spending cuts and tax increases that start kicking in automatically at the beginning of the new year.

The nonpartisan Congressional Budget Office said in an August report said the tax increases and spending cuts would shrink economic output next year by 0.5 percent and push the unemployment rate to about 9 percent.

Moody’s Investors Service said in September it may join Standard & Poor’s in downgrading the U.S.’s credit rating unless the president and Congress reduce the percentage of debt to gross domestic product.

Stocks have been whipsawed since the election as Obama and Boehner dueled in public.

The benchmark Standard & Poor’s 500 Index increased 0.5 percent to 1,416.18 last week and it extended its rally since Nov. 16 to 4.1 percent. The Dow Jones Industrial Average advanced 15.90 points, or 0.1 percent, to 13,025.58.

The bond market hasn’t demonstrated the same level of concern. While total national debt has soared to more than $16 trillion from less than $9 trillion in 2007, U.S. borrowing costs have tumbled. The yield on the 10-year note touched a record low 1.379 percent July 25, down from more than 5 percent in mid-2007.

Obama’s strategy is borne, in part, out of lessons Obama and his advisers take from the failed 2011 attempt to reach a grand bargain on long-term debt reduction.

Obama and Boehner tried to forge a compromise in private talks. Instead of clearing the path, their effort collapsed and served to increase resistance among members of both parties in Congress.

Campaigning Strategy

The president’s team, particularly his political advisers, concluded that it was a mistake to stay in Washington instead of campaigning on behalf of his plan. So on Nov. 30, Obama took Air Force One to Pennsylvania, where he spoke at a toy factory on the need for deficit action -- including raising top-income tax rates. His appearances have been tied to campaign-style appeals for support on the Internet.

In 2011, Democratic backers were alienated by Obama’s willingness to offer deep cuts in entitlement programs, such as Medicare and Social Security, without getting Republicans to agree on more revenue from taxes on high-income earners.

Jim Manley, a Democratic strategist and former aide to Senate Majority Leader Harry Reid, said Obama’s team made the mistake of holding on too long to the idea that Boehner and Senate minority leader Mitch McConnell would compromise.

“They took that lesson to heart and they’re not going to allow themselves to get suckered into reaching bad agreements to get a deal,” Manley said.

Obama’s allies say the president’s election victory and polls showing a majority of Americans support raising taxes on top earners means he doesn’t have to make the same concessions on entitlements that he did in the summer of 2011.

“Unlike last year, Democrats now have all the negotiating leverage, and Republican hostage-taking threatens not just the economy, but the future of the Republican Party,” Richard Trumka, president of the AFL-CIO who attended a fiscal cliff meeting at the White House last month, said in a Nov. 30 statement. Republicans “are still insisting on the very things voters rejected so resoundingly: tax cuts for the wealthiest two percent and benefit cuts to Social Security, Medicare and Medicaid.”

The administration has rejected Republican complaints that it’s not offering enough specifics.

Obama’s Cuts

The White House is proposing spending cuts of about $2.4 trillion. That consists of $1 trillion in cuts already enacted last year, $350 billion in health-care savings, $250 billion on non-health programs, such as farm subsidies, and $800 billion as war costs are pared.

The administration proposes $1.6 trillion in tax increases, with about $866 billion of that from allowing income-tax and estate tax cuts expire for the wealthiest 2 percent of Americans. Obama also proposes about $200 billion in “economic growth” incentives, including stimulus programs, subsidies for mortgages deemed underwater and and extension of the 50 percent bonus depreciation.

Besides campaigning outside Washington, Obama has been selling his stance at the White House. Over the last several weeks, he’s hosted groups of business leaders, assuring them that he’ll accept entitlement cuts if he can win his push for higher tax rates on wealthy individuals like themselves.

Republicans, who won another two years in control of the House, are warning Obama that he’s not the only one to have re-election on his side, and say he’s overplaying his hand.

Representative Pat Tiberi, an Ohio Republican and a member of the tax-writing Ways and Means Committee, said he’s frustrated at Obama’s approach.

“Clearly, the president won 50 states and 75 percent of the vote,” he said. “That’s what they’re acting like.”

Before the election, Republicans privately believed Obama would cave in a budget deal to avoid risking the fiscal cliff, yet after the last week, they see it as a possibility.

“The president has decided, I am convinced, that he wants to just go over this contrived cliff because that’s exactly what he’s wanted,” Senator Jim DeMint, a South Carolina Republican, said in an interview. “He wants more tax revenue, and he wants to cut the military. So that’s what’s going to happen.”

Republican opposition to a $1.6 trillion in tax increases over a decade, $50 billion in stimulus spending, home mortgage refinancing and Obama’s plan to end direct Congressional control over raising the debt ceiling should be taken in context, said Patrick Griffin, former legislative affairs director under President Bill Clinton.

“You’ve got to open with something,” Griffin, who is associate director of the Center for Congressional and Presidential Studies at American University in Washington. “And, they’re still talking.”

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